Flip It: Ex Post Scholarships

By Karl T. Muth - 21 May 2015

Karl T. Muth offers a suggestion to invert how we choose and award academic scholarships in an increasingly competitive education market.

One of the things economics and finance folks have embraced as a pastime in the past few years is imagining how to take advantage of this nearly-unprecedented environment of prosperity, low interest rates, and low US-dollar inflation (2009-present). I’m often pitched by fund managers, corporate treasury folks, and others who think they’ve found some new, novel way to take advantage of the situation. Sometimes they’re right. Often, what they’ve thought up isn’t all that new or novel. So I’m careful when I propose something along these lines.

That having been said, I’ve had this particular idea for a few years and I figured it was finally time to blog about it.

First, I need to provide some context. I help manage a charitable trust that is part of our family’s broader philanthropic giving. I’ve also written a book on philanthropy and thought a fair amount about what “helping people” means, in the broader sense and in the narrow pecuniary sense. In general, I think efforts to help people fail for the same reasons: 1) choosing the wrong person to help, 2) choosing the wrong method to help, 3) misidentifying the magnitude of the problem (and hence the amount of help needed), or 4) misappraising the degree to which the person in question would rather (and is able to) help him- or herself (closely related to, but distinguishable from, #3).

Education is a particularly difficult area. We know, from reliable empirical studies using large longitudinal datasets, that education is key to financial success in the majority of cases. Most people who are more highly-educated and who follow educational paths generally thought to be of higher quality (as evidenced by accreditations, rankings of various species, etc.) tend to have higher lifetime earnings, on average (on average – not in every case). Due to a list of events during the last 200 years too long to recount, America has become the world’s university – if you want to succeed at the highest level in your field, the odds are you’ll either attend an American institution or study a curriculum designed in America during the course of your post-secondary education journey.

And, in America, education is terribly expensive. Tuition plus even a meager cost of living allowance at a school like the University of Chicago costs around $75,000 per year for undergraduate studies. A graduate business or law student living closer to downtown and having a basic automobile for transport could easily spend $100,000 per year including tuition and cost of living (£65.000). Tuition room and board fees for undergraduates at Harvard, Stanford, and other top institutions are similar (Harvard’s optimistic $60,659 estimate includes room and board in a dormitory, but includes no money for a laptop, mobile phone tariff, or even a delivered pizza). So many deserving and well-qualified students want to study in America but it’s a financial impossibility.

This is where scholarships come in. Scholarships are difficult to allocate. People like me work with others to award scholarships and to counsel those who do. Having served for six years on an admissions committee at what the Economist named the top business school in the world, you’d think I’d be an expert at spotting talent. But there is a sea of applicants. Like university admissions committees, scholarship selection committees have many more able candidates than places to award. Some people who would have been successful will not get scholarships. Occasionally, people will get scholarships who shouldn’t have and end up not performing well in school.

What if we could totally eliminate problem #1 that I talked about a few paragraphs back, choosing the wrong person? What if we could guarantee every time that the person you gave that scholarship to was going to do well in school and go on to be a young professional rockstar, ready to launch into a very promising career? Well, I can guarantee that. And it goes back to those low interest rates I was talking about earlier.

With these unprecedentedly-low interest rates, we can simply wait to give scholarships. We can give scholarships after the fact, an ex post scholarship rather than an ex ante scholarship. People would apply once they’ve been out of school two years, at age 24 or 25, and demonstrate what an incredible start they’ve had to their young careers. Those who succeed in such an application would have their student debts wiped out with a “retroactive” award of sorts, an ex post scholarship. To people like me, with a background in the more quantitative social sciences, this has some empirical sex appeal – you can wait and see who does well and reward that. It reduces the risk of choosing the wrong person to zero, because you observe first and award later.

This is neither a perfect, nor a perennial, plan. But it would be foolish to not at least consider exploiting the current situation to the benefit of both donors and students. In this framework, philanthropists get to know they are choosing winners off the podium rather than picking winners in the paddock (to use a crude equestrian metaphor). Students know that it is their hard work being rewarded, not simply their ability to look good on paper or to charm in an interview or to promise success that never materialises. Eventually, the student loan system (currently government-guaranteed at the same low interest rate in America whether the student studies finance or fingerpainting) will be overhauled or interest rates will rise or both.

But, in the meantime, let’s use current conditions to our advantage and craft ex post, rather than ex ante, scholarships. It will be a worthwhile experiment to the benefit of worthy millennials crippled by student debt. And both they and their benefactors will sleep better at night.

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